American-US Airways merger could be end of rough 35-year deregulation era

February 13, 2013|Phil Rosenthal

A merger of American Airlines and US Airways would create the world's largest airline. (KEVIN LAMARQUE, Reuters Photo)

"Two great airlines, one great future" was American Airlines' slogan as it walked the aisle with TWA a dozen years ago, heading into a future nowhere near as rosy as advertised.

If that marriage truly had been something special in the air, American execs might not be hashing out a prenup and dowry arrangements for a potential $10 billion to $11 billion wedding with US Airways that's said to be nearly negotiated, with an announcement expected this week.

Instead, we are seeing what could very well be the end of a Darwinian shakedown cruise for this nation's legacy airlines ignited by industry deregulation, a 35-year stretch marked by sundry bankruptcies (including American filing for Chapter 11 in late 2011), liquidations, consolidations and staggering losses driven by escalating costs, low-fare competitors buoyed by more accommodating labor deals, and not a few strategic missteps.

It's not that the murderous challenge of operating in a business in which profit margins tend to be slender in the best of times finally go away as a result of this coupling, even under the sunniest — and in no way assured — scenarios.

"We're running out of legacy carriers to merge together," said Clifford Winston, a senior fellow in the Brookings Institution's Economic Studies program whose specialty is the analysis of industrial organization, regulation and transportation. "That's what we're dealing with more than anything else."

Sacrificed since the advent of deregulation have been such familiar highfliers as Pan Am, Eastern, Western, National and Braniff. Yet as recently as 2008, there were six full-service majors still standing.

Then Delta snatched Northwest, United grabbed Continental and now American is about to get hitched to US Airways, whose engagement to United was called off in 2001 because of government antitrust concerns at the time. Which would leave three.

"An inevitable outcome of deregulation (is) the reallocation of capital to its most efficient uses," Winston said. "Those people who owned capital — planes and routes — and managed employees, and weren't good at it, had to be driven out of the industry."

That's the way it's been with railroads, telecom and other industries untethered from regulation to define their own markets. "The only question is the mechanism by which that is done," Winston said. "It didn't have to be through merger (with the airlines). It could have been through liquidation, and there were a few that did that, where the airlines could come by and pick up the parts that they wanted."

Assuming this American-US Airways merger happens, the big three surviving legacy airlines will account for about two-thirds of all domestic market share, each with a hold on more than 20 percent. Throw in Southwest, which has evolved from its stripped-down start, and that's about 80 percent of the domestic market spread across just four carriers.

Incumbent upon the new American will be to not just realize projected efficiencies from expansion of its fleet and route network and elimination of redundancies, but perhaps more importantly to make certain the cultures of its two airlines mesh cleanly.

Smaller, nimble carriers such as Virgin America, JetBlue and Spirit will continue to prod it and the other big boys, competing on their own terms. They're a huge factor in keeping domestic fares in check overall, down 15 percent since 2000 when inflation is accounted for, according to government figures.

"While it's taking some time," US Airways President Scott Kirby told analysts last month, "I expect that this strong environment will lead to improving yields across the industry."

Salaries and fuel account for roughly half of an airline's expenditures, according to a breakdown reported last year by The Wall Street Journal, and managing costs is vital.

Analysts expect publicly traded U.S. carriers to have a profitable 2013, but a major part of that will be to continue to keep close tabs on the number of flights and available seats on routes to support fares (and ancillary fees like baggage charges) that are neither too high to compete nor too low to produce a return.

Here in Chicago, where American has a hub, the effects of a merger on passengers are likely to be muted, thanks not only to locally headquartered United and the other carriers in the market, but the number of airports serving the city and the region beyond.

"No carrier is going to stand by and let another carrier earn a lot of money on a route because they're going to say, 'Why aren't we there?' And it's not that hard to be there," Winston said. "The only time that that becomes a problem, and it is a problem in this country, is because of airport access. That's a different problem that we could solve, obviously, if we improved our infrastructure policy, which is a different story."

This story, meanwhile, looks to move on to a new chapter.

The mergers of the deregulation era have been driven primarily by two factors. Carriers have sought access to international routes, which were heavily regulated but are becoming less so. The other motivation has been financial distress.

The new American, United and Delta are all too big now to stay aloft without enough thrust.

"Presumably," Winston observed, "if any one of these three gets into trouble, no one is going to want to partner with them because they're so big, they'll drag them down."